‘Persons in control’ regime recognises changed realities; contextually include FPIs, institutional investors in definition, too
SEBI’s decision to, in principle, shift to the idea of ‘controlling shareholders’ from the current concept of a promoter, makes eminent sense in today’s new corporate environment. It is a more accurate way of pinning responsibility. With founders often moving on and left with only a small stake, it is the financial investors like private equity (PE) players who are calling the shots in many a start-up. It is easy to visualise PEs at the helm of operations, with a professional management in place, relegating the founders to minor roles. Which is why even if they are around, these ‘promoters’ who are not really in charge can’t be made accountable for the actions of others.
However, the existing regulatory regime is a “once a promoter, always a promoter’ kind of construct even if a promoter has pared their stake and gifted it to their children who are nowhere close to running the business. SEBI is trying to change this, so that minority shareholders, and even lenders, can hold those actually in charge accountable. The other regulators must join in to do this quickly.
SEBI’s definition of a promoter excludes a financial institution, a commercial bank or an FPI from being deemed to be a promoter even if they hold 20% or more of the equity share capital, except under specific conditions. However, in today’s environment, institutional investors and financiers, and even an FPI with a large stake, could be the ‘person(s) in control’ running the show, and, therefore, they need to be classified as such. Indeed, coming up with a new set of rules and regulations, by harmonising all the existing ones that define which shareholders are really in control, is not going to be easy. Terms like ‘related parties’ would need to be redefined, and it is going to need a nuanced approach to frame the new rules.
To be sure, simply making people more accountable is not a guarantee against malfeasance; ultimately the ‘persons in control’ may turn out to be as good or as bad as a promoter group. The objective is merely to ensure that the responsibilities lie with those in control and the wrong set of people are not blamed. The boards of family-owned companies are typically packed with family members and it is probably not too different at new-age companies where the boards are manned by those in charge. There is perhaps an opportunity now to reassess the composition and responsibilities of boards as also those of the various committees. It is difficult to say with certainty how things will change for professionally-run banks and companies; at times, the boards of these companies have failed the shareholders.
But, even for them, in the new construct, the rights and responsibilities will lie with the ‘persons in control’. In doing so, the regulators must not dilute these responsibilities. So, for instance, just as it is for the promoters in the current rules, the ‘persons in control’ must also be disallowed from selling their shares for a specified time post an IPO. However, the founders, if they are not part of the ‘persons in control’, can be allowed an exemption from the lock-in period. Even as SEBI and the other regulators work on the new rules, the concept of limited liability should not be ignored. We must move away from the belief that the dominant shareholder is responsible for everything that goes wrong. Although the protection exists in the law, it is too often forgotten.